Class 8: Strategic Interactions

MG106 Strategic Management

José Ignacio González Rojas

London School of Economics and Political Science

July 3, 2025

Today’s Investigation

Three Core Questions

1️⃣ Does Ryanair’s launch strategy make sense?

2️⃣ How will Aer Lingus and BA respond?

3️⃣ What went wrong?

Key lens: Strategic interactions matter

Your success depends on what competitors do

10 Minutes: Map Ryanair’s Strategy

Use WHO-WHAT-HOW framework

Then predict competitor responses

Ryanair’s Launch Strategy

The Market Opportunity

Dublin-London Route (1986)

Current Players

  • Aer Lingus + BA duopoly
  • 500,000 annual round trips
  • £208 unrestricted fare
  • 60-70% load factors

Untapped Demand

  • 750,000 take ferry (9 hours!)
  • Rail + ferry only £55
  • Clear price-sensitivity
  • Market growing slowly

Ryanair’s proposition: Same service at £98

Business Model Comparison

Ryanair vs Incumbents

Ryanair 🆕

  • WHO: Price-sensitive travelers
  • WHAT: Full service, low price
  • HOW:
    • Secondary airports
    • 44-seat turboprop
    • “Better service”

Aer Lingus/BA 👑

  • WHO: Business + leisure mix
  • WHAT: Full service, reliability
  • HOW:
    • Primary airports
    • Jet aircraft
    • Established network

Question: What’s really different here?

The Cost Question

Can Ryanair Make Money at £98?

From Exhibit 4: BA/Aer Lingus Costs

Revenue per passenger: £166.50

Operating costs: £155.10

Margin: £11.40 (6.9%)

Key Question: Where can Ryanair save?

Staff costs? • Airport fees? • Aircraft efficiency?

But are average costs the right metric?

Predicting Competitor Response

The Strategic Choice

Two Options for Incumbents

ACCOMMODATE 🤝

  • Keep prices high
  • Lose some customers
  • Preserve margins
  • “Live and let live”

RETALIATE ⚔️

  • Match low prices
  • Defend market share
  • Sacrifice profits
  • Drive out threat

What determines this choice?

The Numbers Game

Economic Impact of Each Strategy

ACCOMMODATE 📊

Lost customers: 0-64,240

Lost profit: £0-8.8M

Depends on switching

RETALIATE 💸

Price cut: All 500,000

Lost profit: £17-34M

Devastating margins

Accommodation seems rational… but is it?

Beyond the Numbers

Why Retaliation Might Still Happen

Aer Lingus Factors 🇮🇪

  • Government owned
  • National pride at stake
  • Few profitable routes
  • Personal affront (Ryan family)

BA Factors 🇬🇧

  • Privatization coming
  • Need steady profits
  • Less threatened
  • Global perspective

Key Insight: When competitors have goals beyond profit,

your cost advantage might not protect you

The Path to Crisis

What Actually Happened

From Success to Near-Death

1986-1987: Initial success!

  • Mild response (£3 price cut)
  • Near 100% load factors
  • £1 million profit

1988-1991: Disaster strikes

  • Expansion to 27 routes
  • Fierce retaliation
  • £6 million annual losses
  • Hours from bankruptcy

What triggered the change?

The Escalation Dynamic

How Success Bred Failure

“We exposed ourselves” - Michael O’Leary

The birthday cake ad didn’t help… 🎂

The Strategic Lesson

Why Efficiency Wasn’t Enough

Ryanair’s Assumptions

  • Competitors will be rational
  • Cost advantage ensures survival
  • Market is big enough for all

Market Reality

  • Competition is interactive
  • Pride matters more than profit
  • Similar strategies = price war

Being operationally better at the same game = dangerous

Strategic Interactions

The Prisoner’s Dilemma

When Competition Hurts Everyone

Aer Lingus: High Price Aer Lingus: Low Price
Ryanair: High Price Both profit ✅ Ryanair loses
Ryanair: Low Price Ryanair wins Both suffer 💀

The Trap: Individual incentives → Collective disaster

Sound familiar?

Key Takeaways

Lessons from Near-Death

1. Me-too strategies invite retaliation Same game + lower prices = price war

2. Consider competitor motivations Not everyone maximizes profit

3. Success can trigger failure Growth without differentiation = vulnerability

4. Strategy is interactive Your best move depends on their response

So what should Ryanair do now?

Your Options at Rock Bottom

January 1991: Hours from Bankruptcy

Option 1: Exit ☠️ Cut losses, close down

Option 2: Feeder service 🔄 Serve US carriers from Shannon

Option 3: No-frills model ✈️ The Southwest approach

Option 4: Add business class 💼 Move upmarket

Which would you choose and why?

For Next Class 📚

Ryanair (C): The Transformation

Read: How Ryanair became Europe’s most profitable airline

Consider:

  • What changed in their strategy?
  • Why did the new approach work?
  • Can others copy their success?

Key: From playing the same game → changing the game